Q4 2022 KKR & Co Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to Kkr's fourth quarter 2022 earnings conference call. During today's presentation, all parties will be in a listen only mode and following management's prepared remarks, the conference will be opened for questions.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference call is being recorded.
I will now hand, the call over to Craig Larson.
Head of Investor Relations for KKR.
Greg. Please go ahead.
Thank you operator.
Everyone welcome to our fourth quarter 2022 earnings call.
This morning, as usual I'm joined by Rob Lewin, our Chief Financial Officer.
And Scott Nuttall, our co Chief Executive Officer.
We'd like to remind everyone that we will refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release, which is available on the Investor Center section at KKR Dot com.
And as a reminder, we report our segment numbers on an adjusted share basis.
This call will contain forward looking statements, which do not guarantee future events or performance.
Please refer to our earnings release, and our SEC filings for cautionary factors about these statements.
So this quarter, we're pleased to be reporting solid results with 63 cents.
The related earnings per share.
And 92 cents of after tax distributable earnings per share.
I'll start by walking through the quarter.
So beginning first with management fees management fee growth continues to be a real bright spot for us.
In Q4 management fees were $706 million.
It's up 5% compared to last quarter.
And up 19% compared to Q4 of 2021.
And comparing full year 2022 to 2021 Manny.
Management fees increased 28% for the 2.1 to $2 7 billion.
Growth in full year 2022 was greatest within our real assets business, where management fees increased over 50%.
Net transaction and monitoring fees were $195 million with our capital markets business generating $144 million of revenue in the quarter.
Now to go through expenses or fee related compensation margin for the quarter was 20%, which is at the low end of our 20% to 25% range.
Rob is actually going to circle back on this topic in a moment.
And other operating expenses for us were $177 million the.
The increase here compared to last quarter was driven by higher professional fees given activity levels across the firm as well as increased expenses related to capital raising so in total fee related earnings for Q4 were 559 million or <unk> 63 per share with an FRE margin of 61%.
Yeah.
Moving to realized performance income, we generated $339 million with realized carried interest driven by monetization of Minnesota rubber and plastics.
As well as a number of public positions, while realized incentive fees driven by the crystallization of performance fees at Marshall Wace.
Realized investment income was $223 million for the quarter.
Overall, our asset management operating earnings came in at $946 million.
Now turning to our insurance segment Global Atlantic had another strong quarter generating 165 million of operating earnings.
This quarter the results were driven by an increase in invested assets from new business growth.
Alongside our continued rotation into higher yielding assets.
This resulted in an after tax day for us at 822 million or <unk> 92 per share.
Now turning to investment performance and pages, seven and eight of our earnings release.
Page seven shows investment performance across our major asset classes for the fourth quarter as well as the full year.
Beginning first with traditional private equity portfolio was flat in Q4 and are 14% for the year.
Those figures are below public indices for the quarter and ahead of public indices for 2022.
In real estate in the quarter that portfolio was marked down by 8% driven by a widening of cap rates on unrealized investments.
Offset some by strong rent growth in the quarter.
And for the year the portfolio appreciated 3% meaningfully ahead of public Reits as well as broad real estate indices.
The infrastructure portfolio was up 3% in the quarter and up 9% for the year very strong performance in infra.
Given broad volatility again across markets.
And on the leveraged credit side, the portfolio was up 3% for the quarter and minus 3% for the year.
Our alternative credit portfolio was up 1% in Q4 and up 2% for the year.
Volatility in 2022 of course was not limited to just the equity markets.
Investment grade and high yield indices declined, 13% and 11% over the course of the year.
Now, perhaps more important are the figures that you see on page eight of the earnings release.
This page shows investment performance since inception across our recent funds that have been investing for two plus years.
The figures you see here of course reflect any marks taken in Q4 or over the course of 2022.
Looking at this page and taken together, we continue to feel very good about the returns we've been generating on behalf of our clients.
In terms of our balance sheet investments performance was flat in the quarter and down 5% for the year again against a volatile backdrop.
Of note here core private equity investments on the balance sheet has continued to perform.
For the quarter and the year the core PE portfolio appreciated, 7% excuse me I appreciate it 5% and 7% respectively.
Turning to capital metrics, we raised 16 billion in the quarter.
This was driven by fundraising across our growth and traditional PE strategies leverage credit.
Block transaction at global Atlantic.
Alongside incremental flows of gea.
This brings our full year 2022, total new capital raised to 81 billion.
Our assets under management increased to 504 billion as of 12 31 with fee paying AUM coming in at 412 billion.
We continue to find opportunities to invest deploying 16 billion in the quarter.
Infrastructure and traditional private equity accounted for about half of the Q4 deployment with opportunities dispersed globally.
And finally before handing it to run consistent with our historical approach. We're pleased to announce our intention to increase our annual dividend policy from 62 cents to <unk> 66 per share.
This change will go into effect for the dividend announced alongside first quarter 2023 earnings.
And at the same time, we've increased our stock repurchase authorization back up to $500 million.
And with that I'll turn it over to Rob.
Thanks, a lot Craig and thank you everyone for joining our call. This morning.
I thought I'd begin by giving you a sense of our recent annual planning meetings.
We got our senior team together earlier this year to review, where we are as a firm.
Wherever going and most importantly, what we need to get right to capture the opportunity that is in front of us.
Listening and participating in these discussions was incredibly energizing we've.
We've never had a stronger team and been more aligned around where we are going as a firm.
We have a number of very clear avenues for long term and sustainable growth.
And more confidence than ever in our ability to achieve it.
I'm going to step through some of these more material opportunities for growth in a minute.
But before I do that I first wanted to emphasize just a few points about 2022.
Starting with our fundraising.
We raised $81 billion of capital last year. The second most active year in our history and of course, all against a much more complex market backdrop and without significant contributions from our flagship strategies.
Over 70% of our fundraising last year came in our real assets and credit businesses strategies that are often front of mind for our clients and rising interest rate as well as inflationary environments.
Moving to deployment.
We invested a healthy amount of capital over the last 12 months.
Looking at private equity and real assets taken together deployment here was approximately 20% greater in 2022 compared to 2021.
As teams were able to find very creative ways to put capital to work.
For example across GE growth in infra, we announced or closed on 10 take private transactions over the course of the year.
And as our footprint has scaled.
And become more diversified so as our deployment.
Asset strategies for 16% of total firm deployment activity in 2020.
That number totaled almost 40%.
2022.
Over that same two year period credit deployment has increased approximately two and a half times as the business has expanded with global Atlantic as a partner and new focus funds such as asset based finance.
And finally, I'd like to circle back to our compensation expense and the comp margins that you saw in Q4.
Fee related compensation was 20% of fee related revenues.
That is at the low end of the 20% to 25% range that we've articulated historically.
While realized investment income accomplished 10% of realized investment income.
Also at the low end in this case of the outlined 10% to 20% range.
Carried interest comp was at the midpoint for the quarter, which as a reminder is 65%.
Yeah.
This had the impact of reducing our total compensation margin for the quarter.
Which including equity based comp was 32%.
Given realized carried interest generation across KKR over the course of 2022.
We felt that we could move to the low end of our FRE and investment income compensation ranges.
And show some expense discipline in support of our operating earnings.
Importantly, still ensuring that we have the capacity to recruit retain and Incent world class investment distribution and operations talent.
As we think about levers that we have as a firm to generate long term earnings growth from here operating leverage is really a key component.
As a reminder, KKR employees own approximately 30% of our stock. So we are very well aligned to drive margin improvement across the business.
And before I switch gears, let me give you an update on the outlook for Q1 monetization activity.
Things have slowed a bit on the monetization side.
But nothing that is surprising to us given the environment and how we're thinking about the timing of when we want to generate realizations outcomes for our limited partners.
So as we stand here today, we have visibility on approximately $250 million a monetization related revenue for the first quarter.
Yeah.
Now turning to page and looking forward.
We think there are really six key areas that are going to drive significant growth for KKR for several years to come.
The first area is real assets, where we have seen meaningful growth across our platform.
<unk> AUM at the end of Q4 stood at 119 billion.
That's compared to just 28 billion at the end of 2019, So four times growth in three years.
Growth and infrastructure has been driven not only by our flagship fund, but also our extension into areas such as core as well as Asia Pacific.
The real estate platform continues to grow across a full suite of 10 plus products.
Further propelled by both global Atlantic on the credit side, and our acquisition of K J R. M on the equity side.
Our momentum across our real asset platform is obviously quite significant and aligns well with our big area of car focus from our limited partners.
The second area of meaningful growth for KKR is continuing to leverage our market leading position in Asia Pacific.
Looking at our progress in 2022, our Asia infrastructure strategy raised almost $6 billion the largest in that geography, and we closed on our first Asia credit fund as well.
Looking ahead, we expect our Asia real estate strategy to expand in 2023.
As well, our Asia Pac growth franchise.
And as I mentioned, a moment ago, our acquisition of K J R N, which is our Japanese real estate business is.
He is a great example of how we can use our balance sheet to strategically pursue inorganic growth to both enhance our market position as well as to access differentiated forms of capital.
Looking at this progress altogether, our Asia focused a U M has now increased to $60 billion at the end of the year, that's up roughly three times since 2019.
Our local presence paired with our KKR toolkit has created an industry leading business against very compelling long term macro fundamentals in the region.
The third area for us as core private equity, which is just a massive opportunity.
As the addressable market is very significant and the P&L impact can be positive across so many different parts of our financials.
And most importantly, it is an area, where we believe that we have the business model and culture that sets us up well to be the best global player in the asset class.
As a quick reminder, core P is a long duration investments strategy.
And we expect to hold these investments for 10 to 15 plus years.
We currently have 19 businesses within our core portfolio.
These businesses generally have lower leverage than traditional private equity investments.
Tend to be less cyclical and are more cash generative.
These traits do create a more stable earnings profile within the portfolio.
Today, we manage roughly $18 billion of third party capital, which I believe is the largest in our space.
The AUM, we manage positively impacts our management fees transaction fees as well as carried interest.
But core P. E. Now also accounts for over 30% of our balance sheet investments.
Yet these investments only accounted for 1% of our after tax distributable earnings in 2022, when you look at their flow through impact to realized investment income.
Looking at this another way.
And to highlight this point even further.
If you look through our balance sheet to the court P E portfolio.
A portion of the company's EBITDA totals over $600 million.
This is not accounted for in our distributable earnings.
Make no mistake. This 30 plus percent allocation is purposeful.
It is by design, because we have a substantial opportunity to really compound our investments in an asset class, where we know that we have differentiated capabilities.
The fourth big macro driver for us as private wealth.
We currently manage $67 billion of capital here.
<unk> to 37 billion in 2019.
Approximately 15% of new capital raise has historically been sourced from this investor cohort, mostly from high net worth clients and in traditional drawdown products.
Overtime, we expect all private wealth focus capital would count for 30% to 50% of the capital that we raised as a firm.
And along this path, we will continue to expand our footprint in a democratized access vehicles space.
Our ambitions and views of the long term opportunities, we see for KKR have not changed.
Next my fifth point is our continued focus on the insurance space.
Going back to July 2020 at the announcement of the Global Atlantic acquisition theory, AUM was 72 billion.
It's close to $140 billion.
So its grown about two times in the last two and a half years.
Our thesis in buying G was multifold.
We believe that the combination of our leading life and annuity franchise with multiple ways to expand against compelling market fundamentals.
Combined with KKR as origination and capital capabilities could lead to strong growth in <unk> operating earnings and book value, while also delivering for policyholders.
This is really played out and looking ahead remains a key strategic priority for us.
Not only is the 139 billion of GE capital itself perpetual.
But the business has also helped US grow our third party insurance client a U N to 56 billion that's up from 26 billion at the time of the GE acquisition announcement.
As we have continued to create products that are tailored to this unique investor base.
And finally.
The six high impact long term growth driver for us is our balance sheet.
Said, the same thing last quarter as well.
But there's really not a corporate that I know that doesn't wish they had more capital availability right now.
The balance sheet is a clear competitive advantage and its continued ability to enable and accelerate growth in a way that is less dilutive for our public shareholders.
To highlight this point.
M&A or investments in core private equity our buildup in the insurance space and share buybacks have all accounted for roughly 90% of our net balance sheet deployment over the past five years.
And we expect that trend to continue over the coming several years as well.
This is just another tool that we have to be able to drive earnings per share over time.
To summarize.
We continue to feel extremely positive about our future outlook.
The six drivers that I just went through are particularly impactful for long term success.
And we have real conviction across the entirety of our management team and our ability to build on our existing momentum.
With that let me hand, it off to Scott.
Thank you Rob and thank you everyone for joining our call today.
I thought today I would share how things look from Joes and might see.
There's no doubt that markets and the economy remain dynamic.
There's also no doubt many remain focused on the macro quarterly results short term catalysts in the near term outlook for our industry and business.
In summary, there's a lot of noise out there.
We find that noise is just that.
Joyce.
We continue to raise capital find interesting deployment opportunities and selectively monetize our portfolio.
It's business as usual at KKR.
So from our seats, while the noise creates some questions it's important to not let it become a distraction.
The other thing KKR is a long term effort.
Takes years of planning and investment to get right.
Many of the businesses. We are scaling now were started over 10 years ago.
And many of the businesses, we are starting now will be scaling for decades to come.
So we are singularly focused on what we need to get right.
Talent culture performance.
Clients and operations.
If we get those things right, we will double KKR again at a rapid pace.
If we don't our growth will be slower than it could be.
Growth is a result of execution.
So as a management team we're focused on what we can control and executing on those five fronts.
The good news is that as we look back at recent progress we feel like our strategy is being executed well and the results are emerging.
And then just a couple of things we look to as evidenced in the last two years. Our AUM has doubled from $250 billion to 500 billion and our fee paying AUM has more than doubled.
And over the same two years, our management fees and <unk> <unk> per share have almost doubled as well.
So the results of execution are starting to come through.
But these metrics are backward looking.
What's even more encouraging to us is the strong evidence we have of growth continuing to be very attractive for years to come.
Yeah.
Some of this may be apparent from these calls.
And some less so.
The name just a few of the things that we are looking at.
First we've continued to create new businesses over the last several years.
In fact over 50% of the capital we raised last year wasn't strategies that did not even exist five years ago.
And over 50% of our AUM is not yet scale in our definition.
Said another way we have added a lot of recent innovation and half of the assets. We now manage are still approaching the inflection part of the growth curve.
Second.
Our dry powder has grown from 67 billion to a 108 billion over the last two years positioning us well to invest into this environment, which we continue to find attractive.
Third our efforts and democratize products are just starting.
We expect to have multiple vehicles launched this year after two years of structuring and team doesn't work. This.
This is upside for us and we expect will be an additional growth engine for the firm across all of our asset classes.
Fourth global Atlantic goes from strength to strength.
And it's almost doubled assets since we announced the transaction two and a half years ago, well ahead of schedule with significant opportunity ahead.
This and maybe less visible.
Our sales team has grown from 100 people to 280 people in the last two years across institutions insurance family offices and private wealth.
It typically takes a year or two for a new salesperson to learn our products and hit their stride.
The result of this investment will show up over the next couple of years and create even more wind at our back.
Fixed.
Our carry bearing invested dollars and the ground have increased dramatically.
It's important to understand that the cash carry we generated last year largely came from investments we made five plus years ago. When our a M was a fraction of what it is today.
And our carry eligible invested capital was as well.
To be specific.
The vast majority of last year's carry came from harvesting investments made when our carry earning invested capital was roughly $50 billion.
Today, it's about 150 billion up.
Three times.
So don't let the near term monetization environment divert your attention from what matters.
The forward is incredibly strong and this much larger scale of invested capital matures with the returns on the slide Craig suing you.
And finally, and perhaps most important.
Our team has never been stronger or more cohesive.
In summary over the last several years, we've made the investments for the next leg of growth that KKR and see years of opportunity ahead.
And as we've done all of this the earnings power of KKR continues to increase.
This is true regardless of the near term noise end markets and it's what gives us such confidence in our outlook.
So don't get distracted by the noise.
The signals are strong and our confidence is high.
With that we're happy to take your questions.
Thank you.
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One moment, please while we poll for questions.
Our first question comes from Craig Siegenthaler with Bank of America. Please proceed with your question.
Good morning, everyone hope, you're all doing well.
Hey, Greg Good morning, Greg.
So my question is on global Atlanta, I wanted to get an update and hear how early stage credit quality metrics have trended inside of this business, especially given prospects that we may be entering a recession in the U S. In the first half of this year.
Yeah, Hey, Craig it's Rob Thanks, a lot for the question.
The very short answer is that GE continues to trend really well as it relates to its credit exposures.
We've talked about this in prior calls, but 95% of GH book is rated N I C. One or N I see too so investment grade in nature.
The equity bucket G. A sub 1% of total assets and so we've done a bottoms up across the entire portfolio as we've gone into yearend and feel really good without the strength of the balance sheet is holding up.
Our next question comes from Alex Blaustein with Goldman Sachs. Please proceed with your question.
Hey, guys good morning.
I was hoping maybe we could talk a little bit about margins and and scaling the business Zurab. This one's probably for you, but you guys were able to bring down FRE comp this year, partially because of pretty good monetization activity. This year I think as you alluded in your prepared remarks, so if monetization income weekends in 'twenty three for a variety of cyclical factors.
Should we think about that drifting back higher or is there enough sort of scale in the business, where FRE comp rate could be at a low on a run rate on a more sustainable basis, and I guess bigger picture I was hoping we could maybe just again kind of double click into how monetization activity flows through the margins in other.
Of the business you guys report and we sort of think about it in silos, but that's ultimately not how you sort of pay your people. So wrapping all of that around we're hoping to get a little more color.
Got it thanks, Alex a lot in there so let me try and tackle them one at a time.
First let me just start out with margins are we believe that we've created a business model that allows for best in class FRE margins and we've been consistent for a number of quarters now a number of years now probably that assuming reasonable market conditions, we've got a business that can sustainably drive although 60%.
I've already margins in spite of some of the investments that we're making back into our business.
Over time as those investments that we're making pay off.
And as the fees come in on the back of those investments as well as the efficiencies. We believe that we can create a business model that delivers mid 60% FRE margins I think that's going to come in a couple of forms I think that will come from operating expense.
Leverage I think it also has the potential to come from compensation expense leverage as you would've seen in Q4 of this year not taking back to how we thought about compensation margin inside of the quarter.
You know I'd say, a couple of things as it relates to that.
The first we want to make sure that we've got and I said this on the on the prepared remarks, the right amount of compensation of our business such that we can recruit retain and Incent world class talent across the board at KKR and as we looked at.
The pool of compensation that we had available in 2022, and we made the determination that in Q4, we can operate at the bottom end of that range that you asked the question of monetization activity comes down next year, where might that shake out I instead would look at it across our total comp margin and what we've guided historically is on a total comp.
Margin, we can operate in the low 40% range in 2022, we were at $39 seven I believe 2019, 2020, one we were below that 40%.
Guidance number and if monetization comes down and carried interest comes down that's our highest comp margin at.
At 65% and so all things equal you would expect compensation margin across the board.
To come down so there was a lot in your question, but hopefully I got it most of it in and happy to catch up more offline on the topic, yes, Alex the only thing I would add is that.
People understand that monetization if they come down compensation is going to come down as a result of our business you get paid on cash outcomes something that would be a surprise to anybody.
Our next question comes from Glenn Schorr with Evercore. Please proceed with your question Hi.
Hi, Thanks very much.
So you know I'm, a big believer in the Big picture growth picture that you laid out so cool with that one of the five things you talked about getting right is performance and I think your long term performance is awesome I want to focus on 2022 for a second get the right perspective.
E down 14% I think just the fourth quarter real estate was down eight.
Leveraged credit down three I wanted if I I know, it's a longer tail I know your long term track records great.
I Wonder if we could talk about the right perspective on portfolio composition or how you do marks relative to publics. It's that was only the only achilles' heel I I that caught my eye in the quarter. Thanks.
Yeah.
Hey, Glenn it's Rob Thanks for the question why don't I just start with.
Methodology, because I think that that's really important for this discussion than Craigan and Scott.
You can spend some time as it relates to performance we've been reporting as a public entity now for close to 17 years. If you include K P E, which was the predecessor closed end fund that take care of our merchandize too and we really do believe that over that period of time, we've developed best in class process for determining the fair value for our level three assets.
Which are those assets that don't have observable box.
Our exact process and methodology is of course by its nature different by asset class, but what is most important to us is that we have a consistent process methodology quarter after quarter after quarter and we believe that aspect is critical in delivering a fair representative view on fair value, which we think you've seen over time.
<unk> adds in 2022.
The other thing that's worth mentioning on valuation methodology.
As part of our consistent process, we've got a third party valuation agents valuation agent excuse me, who is an expert in their respective space I need to perform the valuation exercise will provide positive assurance on those investments. So if you look at our history, we feel we've got that balance right.
And that our portfolio is.
Certainly impacted by market movements.
As well as by inputs I'd like interest rates and equity risk premiums that might impact DCF to offset over.
Over the course of the year by operating performance as well and so I I think it's important really to understand that our methodology doesn't change and it's consistent quarter over quarter and in that respect we feel really good that we're delivering the right representative mark across our portfolio.
And then Glenn as Craig I did have one why don't I just pick up on one of <unk>.
The statistics, you mentioned, an opportunistic real estate.
And there are really two points there robs already hit on the first just as it relates to the consistency around that process for us and the work we do with evaluation agent in the case of real estate specifically that.
That valuation Asia agent will look at recent transactions and they'll come up with cap rate and discount rate assumptions for that specific quarter. So.
Quarter like Q4 transaction activity was really muted volumes in the U S. We're off something like 60%, but in those observable transactions at cap rates wires and so that's really the.
What drove the performance figure in real estate that you saw for the quarter now the second point, which we think is more important honestly is the fundamentals and the portfolio itself.
As are we continue to feel great about the portfolio as well as those fundamentals. So our exposures continue to be weighted towards those assets in themes, where youre seeing strong fundamentals and strong growth.
Industrial assets Datacenters rental housing student housing storage those are over 80% of the portfolio in total and we're seeing strong fundamentals and cash flow growth. There on the flip side, we globally have only 1% exposure to retail in our U S. Opex exposure is below five and then just to help put that.
Two things together to give you a sense if we had used constant cap rate and discount rate assumptions. In Q4, you actually you would've seen the portfolio marked up in the quarter instead of that down for the quarter percentage that you did see so we can.
We are really benefiting from strong underlying NOI growth and that dynamic is really the reason that we put in page eight so I think as our clients evaluate us across our strategies there looking at the since inception performance much less focused on any 90 day period et cetera.
When you look at our since inception as you noted and we appreciate that in your beginning of the question the performance figures and in the case of of real assets and real estate. The Blue bars, I think we feel great about how we've been performing on behalf of our clients.
Hey, Glenn it's Scott.
If I were you I'd be trying to figure out is there anything to worry about here.
The punch line from my standpoint, there's no.
I think as the Guy said, we've had a very consistent methodology, it's not at all surprised given.
The market has been off multiple spin off.
Some marks come down.
But there just that months.
What matters to us is the fundamental operating performance of the portfolio.
Which continues to be really strong.
We feel even better.
We got it right in terms of investing behind the right themes the last several years.
And profitability metrics remained strong.
London mental operating performance of our real asset book and our credit book remains strong.
Candidly a bit stronger than I might have expected given what's going on with the economy in the backdrop.
Overall, we're not worried about it I would suggest you're not worried about it either my expectation is as markets rebound, let's see the marks rebound as well.
Our next question comes from Brian Mckenna with JMP Securities. Please proceed with your question.
Thanks, Good morning, everyone. So you've done a great job expanding into a number of adjacent strategies and products over the past several years I'm curious now as we think about the next three to five years. So should we expect this expansion into new areas to persist or will more of the focus be going deeper in the strategies you have today and moving more of these platforms platforms from earlier stage.
As of the lifecycle to more mature and scale in stages.
Brian Thanks for the question I think it's going to be much more focused around taking what we have today and scaling that up we think there is more than enough room to have very substantial growth and as we've outlined our 2026 profitability measure is greater than $4 of FRE per share $7 of T D for sure.
That doesn't rely on adding a lot of new products to over doing that said, we continue to D. R.
Our focus on innovation, we are likely to add products over time, where we believe there's large addressable markets and where we can be a top player in the world of what we do but that list is going to be small because I think we believe that if we go execute on what we have in front of us today take that 50% of our products that arent, yet at scale and get them to.
A scale, that's a growth opportunity theres going to be much larger than starting something new from scratch.
Yeah.
Our next question is from Mike Brown with K B W. Please proceed with your question.
Yeah.
Great. Thanks for taking my question.
So I wanted to start with the <unk> is really a strong quarter, there and then given the favorable rate backdrop.
New business trends that you've been seeing.
Any thoughts of how we should think about the next six to 12 months from from that business. If you could maybe touch on the net investment income and the net cost of insurance that would certainly be be helpful. Thanks.
Yeah, great. Thanks, a lot for the question.
Clearly global Atlantic in the two years of our ownership has had a really outstanding performance and we had a target of 12% to 13% type of ROE.
Without achieve that over the course of 2021 and again in 2022.
I do still believe that that's the right level of which to model G. A on a go forward basis, we are benefiting from right now on the investment that investment side of the business, we're certainly benefiting from.
From a greater deployment as we've rotated our portfolio, which.
Which we took some upfront losses on given where interest rates are and to put that into higher yielding securities.
We've also benefited while we're pretty well asset liability matched we do have a decent size floating rate book and so as interest rates have gone up G. A has benefited from that as well at the same time now our cost of insurance is of course gone up the price of which we price our annuities has gone up but I think the team's done a really good job on the operating expense side.
The business in an overall youre seeing that operating leverage flow through so we continue to be really encouraged I think 12% to 13% still the right range to model that business going forward and hopefully they're going to continue to be able to outperform.
Our next question is from Gerry O'hara with Jefferies. Please proceed with your question.
Great. Thanks, Good morning, folks, obviously fund anything remains a topical items. So just sort of hoping you could comment a little bit on how conversations with mlps have been evolving over the past several months and also to the extent you might be able to just sort of address this whole dynamic around L. P allocations and they're sort of.
Quote unquote budgeted as a as we as we look into 2023 and beyond thank you.
Thanks, Jerry it's Scott I'll take that one.
Yes, it's hard to answer that question in a quick fashion because it kind of depends on where you are and who you're talking to.
So theres no doubt kind of as we got into the back half of last year.
Some of our Lps were struggling with allocations on the back of a reduced denominator that was predominantly a U S pension fund dynamic.
As the calendar turned and Theres, a new budget year. Some of that has softened and we're having conversations that indicate they are looking to put capital to work.
But if you go outside the U S.
At least Asia sovereign wealth.
<unk> in particular.
We find investors are struggling with those same issues. In fact several of them are very forward leaning and trying to figure out how to invest into this environment.
So the overall picture is not consistent depending on where you are.
What is very consistent though is we're finding this year just like last a lot of interest in a couple of things.
Anything with inflation protection and yield.
So think real estate infrastructure credit significant amount of interest.
I'd say.
Increased awareness that in times like this all things private equity.
Tend to perform quite well so some very strong vintage years coming out of this period of time, so people kind of swinging a bit to thinking about how to take advantage of this environment.
So I'd say people are more on their front foot. This year overall and maybe late last year and there is more of the conversations gearing toward how do I invest in today.
Thoughtful way.
And I think part of that as people look back and post GST and maybe post the initial stages of Covid. Some wish they were maybe a little bit more aggressive in terms of deploying into the environment.
And I think thats whats leading to some of this shift in sentiment.
Our next question is from Bill Katz with Credit Suisse. Please proceed with your question. Okay. Thank you very much good wave one and I. Appreciate you taking the question maybe circling back to one of your growth drivers I'm Wonder if you could just talk a little bit about on the global private wealth opportunity you mentioned a couple of new pro.
It's coming out maybe update us on what you're hearing from their respective channels just given some of the mixed macro backdrop at higher yields are in more liquid products and.
What what might be having in terms of behavior and demand as you scaled the business. Thank you.
Hey, Bill it's Craig why don't I start [noise] look I think the tone in any near term period is going to be influenced by what we all see in broad markets.
I think we'd encourage everybody.
Not to Miss what really is a huge opportunity for us and when we look at how we're positioned.
With our brand our track record our ability to innovate the relationships that we enjoy with distribution partners I think some of the things that Scott mentioned in our prepared remarks, we spent the better part of the last two years.
<unk> affirmed positioning ourselves.
To be in to be able to launch a handful of new products and we are on the cusp of that currently so I think we just feel really well positioned in what is an enormous Matt.
Massive addressable market and again, our views of the opportunity.
Here Hasnt changed and I think I guess, one final thought and in a product like crest again, we think the performance of Kras and the experience that people have had with that as an entry has been great. So performance was.
And 8% over an 8% return in 2022, 16% inception to date over a 5% current yield. So I think when we look at the initial experience that investors have had from that democratize products, we feel very good.
And what they've experienced.
Our next question is from Patrick Davitt with Autonomous Research. Please proceed with your question.
Hey, Thanks, Good morning, I have another follow up on the on the real estate market is there any specific region or specific type of assets in the portfolio, where those transaction comps comps drove the mark and.
As a follow up to that could you give us some idea of where the cap rates were moved to and where they were before.
Patrick we haven't disclosed the specific cap rates I think the dynamic this quarter. It is one I think I wouldn't be we wouldn't be surprised if you actually see.
A real variability in those cap rate assumptions is again, it's each managers, probably going to view the the data points differently and what youre going to see in this 90 day period.
And again like the book that we have is going to be predominantly U S. Based just given the maturation of our portfolio.
And again from an overall exposure piece.
As I had mentioned.
You know our largest allocation is 35% in those industrial themes and 80% in those themes, where we're continuing to see really strong.
Growth.
Almost by definition.
Those are going to have the big just given the significance of those in the portfolio. Those are the instances that are going to be the biggest contributors to that movements in the quarter.
Our next question is from Brian Bedell with Deutsche Bank. Please proceed with your question.
Great. Thanks, Good morning folks just wanted to come back to the retail democratize hurt of the retail strategy.
If you could just remind us on the AUM you have right now in the in the actual democratized products, where where you might think that could go to over the long term realize its a its definitely a long term build and then you know how many products you plan to launch this year and then and then going back to the FRE margin part of it.
As you scale, the overall business and improved operating margins.
Should we be thinking of the rollout of those democratize products as you know as a near term headwind as you pay for shelf space and and build up the infrastructure to scale back.
Hi, Brian It's Craig why don't I start.
And then.
Rob pickup on the FRE margin impact just in terms of framing that significance for US again, we've got about 500 billion of AUM roughly $6 billion or in these democratize vehicles today, So it's a little over 1% of our AUM.
In terms of the launch of additional <unk>.
Products and where we are from here given the SEC rules and filings that we've made we can't get into a lot of the specifics.
But suffice to say.
We think theres more to come in the first half of the year and we will keep you abreast as we as we continue to make progress Brian some of those costs that you referenced are costs that we've talked about where we've been investing back into the firm and distribution and marketing.
As well as in technology some of that technology supports our efforts in a democratized vehicles. So as we talk about operating in the low sixty's and overtime gravitating, our business model to get to the mid sixties that incorporates how we're thinking about to democratize access vehicle space and Brian The only thing I'd add is you know.
We've said over time, if you look at kind of where we've been someone get individual investors. So think democratized plus some more traditional fund format are sold through platforms individuals', that's been roughly 10% to 15% of the capital that we've been raising X D. A.
And we said that we expect that over time to trying to 30% to 50%. So to your question of where do we think this goes over time and think of it as kind of an increasing percentage.
A larger base.
We've also shared over time that we expect to have democratized versions of what we're doing across all of our major product areas in the near term and that's still the case.
Our next question is from Finian O'shea with Wells Fargo Securities. Please proceed with your question.
Hi, everyone. Good morning, a follow on to the insurance Roe.
Appreciate your color on on portfolio rotation.
Into higher yield striving the impact with with that considered how long should we expect the normalized ROE remaining elevated.
In today's environment with today's portfolio understanding the inputs can be hard to predict.
Yeah.
Thanks for the question.
I do think that that 12%, 13% range continues to be a good one for next year.
And while there are some things that can.
Elevate that number as we look forward there was some timing elements in 2022 as well on that portfolio rotation. So I think that's still a good range for the near term as I said, we hope that the <unk> team is able to generate returns that are in excess of that they've done that in 'twenty, one and 'twenty two.
Our internal modeling suggests that's the right range for 'twenty three.
Our next question is from Michael Cyprus with Morgan Stanley . Please proceed with your question.
Hey, good morning, Thanks for taking the question just on deployment just curious how you would characterize the $71 billion of capital that was deployed in 'twenty. Two it seems like a large quantum of capital similar level as 2021, but a tougher backdrop. So just curious how you'd characterize that relative to your full potential and what the scope for that deployment to say <unk>.
ROE in a meaningfully step function higher level, maybe in 23 or 24, just how you're thinking about the capacity you have to deploy and what that might look like five years from now and then just a quick housekeeping question for Rob just if you could help quantify the investments and realizations off the balance sheet in the quarter.
Hey, Mike It's Craig why don't I start on deployment I think a couple of things when you look at our activities. One look the primary markets are pretty shot.
Capital is very precious.
Those are good things for us and particularly when you look at the 100 plus billion of dry powder that we have as.
As a firm.
I think when we look back at our activities in 2022.
I think we feel very good about capital that we put to work where value focus we love carve out as one of the things where I've talked about that I think is pretty interesting against just the amount of public to privates, we did an environment and an environment, where public park, which are really dislocated.
I think for us to have announced or closed on 10 take privates.
Is it pretty interesting statistic eight of those were done outside of the U S and private equity infrastructure real estate. So I think on balance we feel really good about that balance of activity. A couple of other thoughts just as you look at deployments. Some statistics that as we go so you're saying, it's always kind of interesting to reflect back.
I think one you're seeing real diversification so in 'twenty to traditional private equity deployment for us was $14 billion.
Real estate was 14 infrastructure was 13, so I think when you look back at this.
Really a reflection of how the firm is meaningfully grown and diversified by strategy and by geography kind of brings us to the second point, which is some of the growth you've seen so in in real assets. As an example is our infra and real estate footprint has grown you've seen deployment grow meaningfully you know Rob gave some of the statistics earlier on.
AUM growth in those businesses, but real assets deployment in 2018 and through 2020 averaged a little over $4 billion, a year pretty equally split between infra and real estate.
Last year that was 28 billion. So again, we've gone from 40 to 28.
Again pretty equally split between those two businesses for us and the third point.
And I think this is this is not as well understood, but it's interesting when you look at private equity deployment for us.
I think there's a.
Again, I think we look at we feel good about when we deployed where we've leaned in let me give you a couple of statistics. There. So I think in 2020 during Covid I think everyone will remember we leaned in.
Our deployment was around 33% higher in 2020 versus 2019, I think we are more active than our peers I think people remember that in 'twenty. One it almost felt like the industry felt the need to play catch up and industry deployment was that materially so in the U S. P investment activity in 'twenty, one was more than double 2000 <unk>.
I think that's what many people remember and in some ways fear.
For us our deployment was flat so again.
You didn't see any kind of an acceleration into that really frothy environment and then in 'twenty two again, a year with a lot of volatility in challenged end markets as you noted.
Alignment for the industry was down over 20 deployment for us in private equity was up 35%. So again I think you've seen this really thoughtful of dynamic over time of how we've looked to deploy and take advantage of dislocation and then the final point just relates to credit again that same scaling thought so in 2019 total credit deployment was $10 billion.
Our 2020 that deployment was 10, three and last year deployment for US was 25 billion. So as the credit business has grown as <unk> come online you seen a meaningful increase in that deployment.
So again long winded answer, but hopefully that gives a little bit of flavor for the activities you saw last year.
Only color I'd add to that Mike is if you take the numbers apart you're right.
It was relatively flat in the low 70 billion.
In 'twenty two versus 'twenty one.
But if you look at the makeup.
Bit of a shift credit was actually down year over year part of that is overall transaction activity in the market part of it is we had a lot of work on the G. A for them to do.
'twenty one in particular, but if you look at private markets I think private equity infrastructure and real estate are the claims it was actually up 20%.
So we were leaning in to Craig's point into.
So that kind of what was happening with the markets last year after maybe being a little bit more cautious in late 'twenty, one in a high valuation environment.
And then Mike real quickly I realization deployments for both $400 million for the quarter off the balance sheet.
Our next question is from our NOG the block with BNP. Please proceed with your question.
Good morning, if I could just follow up quickly on the on the last question could you talk about I guess about the outlook a bit more on on deployments are you seeing from the financing conditions improve in private equity is the bid ask spread starting to narrow some of them.
The participants in the industry are talking about it as an issue is that improving.
Equally if you could comment a bit more on <unk> I mean, thats, obviously been a very active area of the market.
Are you seeing the pipeline of opportunities for deploying there.
Yeah. Thanks for the question I think on deployment and looked at the debt markets I haven't fully healed, but despite that we've continued to find ways to deploy capital.
I do think the capital markets business actually gives us a real leg up and helping to put.
Put together the debt the debt side of our capital structure.
Where we're where we're interested now would include.
Those areas, where we think we can really bring our operational resources to bear and move the needle again, we love carve outs, we've been very active public to privates I think by strategy you actually hit on probably the single busiest area in our firm and Thats infrastructure and I think infrastructure. It's just continues to be a.
A real success story and a real growth story for us.
When we look back in our April 21, Investor Day, We gave a bunch of statistics, there are actually where we thought <unk> would be over the course of 2022 just to give you a sense at that point in for AUM was $17 billion.
We estimated that at that Investor day that in for AUM would exceed 30 and as of yearend. We are at 51 against that that 30 billion estimate all organic.
We look for management fees effectively to double from that 150 million to $2 75 to 300 was our estimate for 2022.
And for the full year info management fees came in at $3 40. So nicely ahead of the top end of that range and we've got $9 billion in for capital that will become fee paying as it's invested at a weighted average fee rate of about 120 basis points. So not only were rebuilt the high end, but we've got.
It's a visibility towards future management fee growth and I think as we look at opportunities for us that.
That opportunity for continued growth and innovation.
Hasnt stocks. So again, we think it's an asset class that can lend itself nicely to that to the democratized marketplace.
And we think the renewable space is again, an area, where our presence can increase so I appreciate you're asking about but it's been a real bright spot for us the only color I'd add is that our pipelines have been strong this year.
Across asset classes and I think to your question. It does take about a year for.
Or the public and private market valuations to start to align.
Getting close to lapping that and we're starting to see that show up in the pipeline.
Yeah.
Yeah.
Our next question is from roof is Hahn with BMO. Please proceed with your question.
Oh, great. Good morning, Thanks very much.
Just a follow up question on global Atlantic I was just curious to get your thoughts around the outlook for inorganic growth, but in the coming quarters any color on the pipeline that would be helpful.
And would you consider raising or bringing on a third party investors to accelerate organic growth and M&A. Even further thank you.
Yeah. Thanks for the question of if it's.
You've hit on a.
A spot of a lot of activity actually in our pipeline.
Around the institutional side of our business at Global Atlantic is frankly is a big as it's been certainly since our ownership and probably since <unk> founding and so a lot of resources going into the institutional side of the business.
And that's both in the U S. But that's also a global I think there's a real opportunity to leverage our kkr's franchise in Europe , and Asia to help global Atlantic row in those parts of the world. So a lot of effort there.
We do have today is as you talked about third party flows of capital. We do have some couple of capital called the IV today.
That Ah participates alongside some of our block reinsurance activity. It's a big part of our go forward strategy and I would certainly I would love to continue to.
Two are to be able to add capacity to the IV strategy to help support global Atlantic and its growth in the future.
Our next question is from Chris Kotowski with Oppenheimer. Please proceed with your question.
Good morning, and thanks for taking the question.
I wanted to ask about the core private equity business and I think if I heard him correctly I think Rob referenced that it's 600.
<unk> million dollars of EBITDA, which is about 15% of your pre tax earnings, but only 1% of D E and.
And I guess I'm wondering when and how.
What is your philosophy or outlook on when and how the the EBITDA starts converting into D. E. I mean, do we have to wait 15 or 20 years to these investments are mature and ready to be monetized or are these companies in a position where they can start throwing off steady dividends or does it do.
Their cash flows have to be reinvested to keep the growth going or are their dividend recaps down the line or.
What is the.
I guess the strategy for converting to the EBITDA in two D E four for KKR shareholders.
Really really quick I appreciate the question, Chris Let me start really what we're where we wanted to do first is highlight to you and all of our shareholders. The fact that we think there is a fantastic portfolio that we're building in core that is generating a significant amount of underlying value creation.
And you're right, it's not yet showing up in our distributable earnings part of that the reason for that is because you report D, which as you know is a cash metric.
These investments by their very nature are meant to compound for a very long period of time. So it shows up in our markets book value per share, but not in the.
And you're right, we would need to sell them, we would need to pay dividends or do some kind of a dividend recap for actually show up in the <unk>, but even that I think would understate.
The quality of the underlying earnings because these businesses are designed to have recurring revenue and recurring bottom line and so part of what we're doing now is just sharing with you that we've got a little bit of that disconnect that we're building. This portfolio that we feel great about it is the largest shareholder and we think it will show up in some parts of the financial statements, but not others today.
There's some of these businesses will start to pay dividends in the near term. So we'll share that with you as we go along but one of the things that we've been discussing is how over time can we make it even more clear the value that's being created in that part of our strategy and what are the ways to do that is just one example, global Atlantic as you know we consolidate our share of.
G as earnings which is a long term compounding investment that has a lot of other strategic benefits to it but not dissimilar to some of the things that we're doing with the core portfolio in terms of the underlying it just shows up in earnings and core today doesn't at least yet so part of what we wanted to do is create a dialogue with you and our shareholders. So you know where we were.
And then over time.
Scott how can we actually remedy that but it's a good problem not a bad problem.
We have reached the end of the question and answer session I'd like to turn the call back to Craig Larson for closing comments.
Rob Thanks for your help this morning, and thank you all for your continued interest in KKR and we will.
Look forward to giving you further updates on our progress in the quarters ahead. Thanks again, everybody. Thank you.
This concludes today's conference you may disconnect your lines at this time and thank you for your participation.